Episode 126 of Economics Explored features a conversation about the pros and cons of a Universal Basic Income (UBI) with my old University of Queensland economics classmate Ben Phillips, now an Associate Professor at the Australian National University (ANU). Ben is one of Australia’s leading modellers of the impacts of tax and welfare policies on households, so he’s the perfect person to chat with about UBI. Here’s a video clip from the episode to give you a sense of the issues Ben and I discuss.
You can listen to the full audio episode using the podcast player in this post or via podcasting apps, including Apple Podcasts, Google Podcasts, Spotify, and Stitcher, among others.
A transcript of EP126 is provided below.
About this episode’s guest – Ben Phillips
Associate Professor Ben Phillips is a Principal Research Fellow at the Centre for Social Research and Methods. He has nearly 20 years of experience as an economic and social researcher in Australia. Prior to joining the ANU Ben was responsible for a range of modelling projects at NATSEM including the STINMOD microsimulation model of Australia’s tax and transfer system. Ben managed several key projects including the distributional analysis of the Australian Government’s 2014-15 and 2015-16 Budgets.
Prior to joining the ANU Ben twice worked at NATSEM and has also had roles at the Australian Bureau of Statistics as a methodologist and economist, The Housing Industry Association as a senior economist and the Bureau of Tourism Research as an economic forecaster. Ben has a first class honours degree in economics and is undertaking a PhD through the Crawford School of Public Policy focusing on the tax and transfer system.
Links relevant to the conversation
EP112 – Taxing the rich: Billionaire and inheritance taxes with Miranda Stewart
Ben’s co-authored 2019 paper: A basic income for Australia? Exploring rationale, design, distribution and cost
Economist article Gene quotes from: Might the pandemic pave the way for a universal basic income?
Thanks to the show’s audio engineer Josh Crotts for his assistance in producing the episode.
Transcript – EP126 on UBI w/ Ben Phillips, ANU
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:01
Coming up on Economics Explored.
Ben Phillips 00:04
Well, I think there’s some ideas of UBI that we can borrow. I think a lot of the issues we’ve identified could be used to improve what we’ve currently got. I think a more realistic and practical approach is probably just to fix up some of the issues in the current system that have fairly minimal costs.
Gene Tunny 00:19
Welcome to the Economics Explored Podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is episode 126 on UBI, universal basic income. The pandemic has amped up enthusiasm for a UBI, because people have seen government’s boosting various welfare benefits and paying new benefits. Would a UBI have been a better option? Does the huge spending on emergency support during the pandemic prove that governments could afford a UBI? These are intriguing questions.
My guest this episode is Australian National University Associate Professor Ben Phillips, from ANU’s Centre for Social Research and Methods. Ben is one of the world’s leading experts on micro simulation modelling. As background, here’s how the Urban Institute describes micro simulation. In the social sciences a micro simulation model is a computer programme that mimics the operation of government programmes and demographic processes on individual micro members of a population, people, households, or businesses for example. For each observation in the large scale survey, a computer programme simulates outcomes of interest, such as income tax liabilities or Social Security benefits, by applying actual or hypothetical programme rules to the survey data about that observation. This is what you need to do if you want to analyse the costs and benefits of a UBI.
And hence, I thought, Ben would be the perfect person to talk to about UBI. And indeed, he has done some great research work on a UBI here in Australia. I’ve known Ben for over 25 years. We’re both in the same honours year in economics at the University of Queensland. Ben’s worked at the world leading National Centre for Social and Economic Modelling, NATSEM, the Australian Bureau of Statistics, and the Housing Industry Association. His micro simulation work has been widely quoted in the media, and he’s the go-to expert in Australia on the impact of the federal budget on households.
Please check out the show notes for links to materials mentioned in this episode. And please check out our website economicsexplored.com. If you sign up as an email subscriber, you’ll be able to download my new ebook, Top 10 Insights from Economics. If you have any questions, comments or suggestions, then please either record them in a message via SpeakPipe, see the link in the show notes, or email them to me via contact@economicsexplored.com. I’d be really interested in whether you have any suggestions of good people to talk to about UBI in the US, the UK or other parts of the world. While I think that the points I make in my conversation with Ben this episode generalise to other economies, I’m conscious that there are specific circumstances in each economy, which may modify the economics of a UBI somewhat.
Okay, before we get into it, I’d like to ask you to please stick around until the end of the conversation, after which I will follow up some of the points in the discussion with Ben. Righto. Now for my conversation with Ben Phillips on UBI. Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Associate Professor Ben Phillips from the Australian National University, good to have you on the programme.
Ben Phillips 04:16
Hello there, Gene, how are you doing there?
Gene Tunny 04:18
Excellent. Thanks, Ben. Ben, I’m keen to chat with you today about this concept of universal basic income. So this has been requested by a listener of mine who’s just fascinated with this concept and suspects that given where the sort of views that are often expressed on this programme, he suspects I’m probably sceptical of it, and he’s generally right, but I’m sceptical of a lot of proposals. But I do remain open-minded and I want to understand what it would involve and just whether it could be feasible, what it would look like. And given that you’ve done some great work on this in the Australian context, so you’re one of Australia’s top micro simulation modellers. So you understand all the data about what people are earning, what they’re paying in tax, what welfare benefits they’re getting. And so I thought you’d be great to chat about this issue. So to kick off, Ben, I’d really like to sort of just establish, what is this idea of a universal basic income. So are we talking about a payment that goes to, everyone, so every adult in the economy, of a particular amount, so I don’t know, 10,000 a year or 20,000 a year? And that’s the idea to give a basic type of income? That’s essentially what we’re talking about?
Ben Phillips 05:47
Look, I think at its most simple level, there’s lots of different models of what it can be or what it might not be. But typically, what you’re talking about is, at the moment we’ve got a very means-tested system of welfare payments. So you say you have to be unemployed, or you have to be a single parent with young children or you have to have a disability to receive a certain payment. Those payments vary by your age, or what type of payment that you’re on. They’re relatively meagre, I suppose. Universal basic income, obviously, as I said, it varies. You’re typically looking at, as you say, of a payment of say at least the amount of say the JobSeeker Payment that we have in Australia at the moment, which is around about sort of $14-15,000 per year, and potentially higher than that. So I say maybe the age pension or even higher. I think the Greens at the moment, the Greens Party, are actually suggesting I think it’s about 1,150, 1,160 per fortnight, which is a fair way above even the age pension. So the age pension is about sort of nearly $1,000 a fortnight, and I think the Greens are after a payment of over 1,100 per fortnight, I think for all adults in Australia. So at the moment, current welfare payments might go to around about say, oh, with maybe around about 4 million people in Australia at varying levels, so JobSeeker, that 600 a fortnight, up to say, 1,000 a fortnight for the age pension, whereas if you had a full blown universal basic income, say as say the Greens are suggesting, you’d be looking at about, you know, a payment of 1,150 a fortnight or getting up towards $30,000 a year for around about 20 million Australians. So it’s a huge difference. And obviously, that requires some rather astronomical numbers in terms of financing. But of course, there are different models of basic income. That’s just, I guess, what we most commonly perceive as being universal basic income, everybody gets enough to get by. And obviously, someone has to pay for it, either through more personal income tax or wealth tax or some other form of tax.
Gene Tunny 07:41
Right. Okay. What are the different models, Ben? What sort of things are you thinking of?
Ben Phillips 07:48
Well, there’s various models in terms of, I guess, generosity. So the most generous one that I’ve seen is really what the Greens are currently suggesting. And that is where you’ve got about $30,000 per year for every single adult in Australia. Going down from that, there’s others who have proposed, I think Ross Garnaut, not that long ago, proposed a similar system where every adult gets a certain amount of money. I think it was more like the JobSeeker or the old Newstart payment, which is more like about sort of $13-14,000 per year, so a lot less expensive. And then going down from there, you have what I guess we’ve looked at a few different models that are much cheaper than that. And that’s where you’ve got more of a means-tested approach, or what in one of the papers we’ve called affluence testing. So that is, the higher your income or the more wealth you’ve got, the less you would receive. So it’s a little bit like means testing. There’s other versions that are similar. So things like a negative income tax, that’s where everybody gets like a tax refund, a full tax refund of say maybe $10,000 per person, that as your income increases, you lose some of that, and at some point, it goes to zero. So that’s another way of looking at it. Another one is sort of a guaranteed minimum income. So everyone has a sort of a guaranteed minimum amount that might be say you’ve got at least $10,000 per year. And again, that’s means tested. So the more you earn, the less of that you get, and obviously at some point, it peters out to nothing. So that’s sort of the basic models. Obviously, the full-blown basic income’s easily the most expensive, and I dare say the most unlikely to ever, evidenced to be so boring to legislation in Australia, or to the past legislation in Australia, whereas the guaranteed minimum income, that might be something that’s a little more realistic. Obviously, they’re all quite different to our current, very tightly means-tested system. We also have a lot of conditionality on our current payment system or current welfare system, particularly if you’re working age, obviously for an aged pensioner. If you’re under a certain income limit, certain wealth limit, you get that payment. But if you’re of working age, unless you’re disabled, there’s usually some sort of fairly strict sort of workplace sort of, I guess, work requirements that one must get through.
Gene Tunny 10:02
Yeah. And that’s allowed Australia to have a, well, a very cost effective welfare system, you could argue, or one that … I mean, arguably, the benefit of means testing is you can assist the people who really need it at a low fiscal cost, or that that’s the theory, isn’t it? So that you could argue that, well, you know, what’s wrong with that? Isn’t that a great idea? I mean, UBI is sort of moving away, a long way from that. It’s the opposite of means testing, isn’t it? Is that right?
Ben Phillips 10:34
Yeah, so the current system, Gene, just to put it in perspective, so we currently pay out about a little over $100 billion per year in welfare payments to adults. There’s another sort of 20 or so million in family payments, which is effectively for the cost of children. So you put that to one side, if you will. So about $100 billion dollars. So the most expensive welfare system under a UBI, say under the grand scheme, would be somewhere around about $500 billion per year. So you’re looking at an additional $400 billion per year. Keep in mind, Gene, the current federal tax receipt is about 500 billion. So you go from 500 billion to 900 billion. That’s an unbelievable amount of money. And as you probably remember well, Gene, we had a big argument, big fight about carbon pricing in say 2012. That was over about a $5 billion tax. Now, regardless of what we thought of the carbon price, we’re having a big argument over 5 billion, how would we go with an additional 400 billion? Having said that, of course, you don’t have to have the full-blown measure, the full-blown universal basic income. But even the more sort of the cheaper versions, say like the affluence-tested model that we’ve modelled was more like a bare minimum of $100 billion per year. So you’re still looking at having to sort of double the welfare system in Australia, and knock-on from that is to increase taxes by, you know, 20, 30% across the country. So I think in a current environment that’s very unlikely to ever happen. But still it’s an interesting idea to think about, I guess.
Gene Tunny 12:04
Oh, absolutely. Certainly interesting to think about. So a couple of things I want to pick up on there. Ben, you mentioned negative income tax. So that, I think that was associated with Milton Friedman, who I’ve got a poster on the wall there. So he was advocating that back in the 70s I think. There’s a great paper that you co-authored along with Miranda Stewart, who’s been on the programme before. We chatted about wealth taxation, and in a way this discussion sort of goes on, or it’s related to that discussion. So we’ll go into that a bit later. And with David Ingles, or Ingles, is it? Sorry.
Ben Phillips 12:44
Ingles, yeah.
Gene Tunny 12:45
Ingles, great. Yep. And it’s got an excellent intro where you go through just the history of this proposal, and you talk about how it was suggested by Bertrand Russell, this basic income concept. And then the idea was resuscitated during the 60s, when Milton Friedman, among others, they proposed this negative income tax you talked about, and there was an experiment. There were negative income tax experiments in Canada and the US in the 70s. I’m going to have to look up those, because that sounds fascinating. And George McGovern, who was a US presidential candidate, he was proposing a $1,000 demo grant to all citizens. And then what the paper does, which I like, is it says, well, okay, this idea is coming back, because there’s this growing concern about wealth inequality, and there’s this growing concern about AI and automation, and we won’t have any jobs in the future, there’ll be fewer jobs, even for accountants and lawyers possibly, and just given how good the AI is getting. And so you’ve got a lot of people in Silicon Valley even, they’re proposing this idea of a UBI. I think Andrew Yang, who is a US presidential candidate, has this idea. So from what I’m sensing, it’s come out of this concern about wealth inequality. You’ve looked at the possibility of a wealth tax paying for this UBI. Is that the sort of thing that you’d have to do? Because you mentioned, look, people would probably, you know, they’d push back on a big increase in taxation. Is there a way of sort of taxing the richest or the wealthiest, the billionaires? Is it possible to get more tax out of that group to be able to pay for this UBI? Have you looked at that, Ben?
Ben Phillips 14:42
I think no doubt there’s probably some there’s … I think most of the modelling I’ve seen around taxing billionaires is a little disappointing in that the amount of money you typically get out of billionaires isn’t usually as much as what people might want to think. I think the Parliamentary Budget Office has done some recent work around, it was a Greens proposal again for taxing billionaires. I’m not saying it’s a bad thing to do that, but the amount of money is probably not really enough to be funding these sorts of schemes. You have to have a revenue base that I think is a lot broader than just say billionaires, which we may only have, you know, a couple of dozen or so in Australia. And it’s a pretty precarious base anyway. During good times, it might be healthy money, and during bad times, well, who knows, you might not have too much at all. So you need to have a fairly broad-based wealth tax, if that’s the path you’re going to go down. And that certainly could be done. I think we probably don’t tax wealth as much as we probably could in Australia. We’re very income-heavy. And that’s something that we could look into changing. But if you’re going to find additional money, you’d have to have a fairly broad-based wealth tax. And it’s certainly true to say that saying superannuation at the moment, there’s a lot of concessionality there in superannuation taxation, which perhaps goes further than where it needs to do. And I guess beyond that there’s the family home. There’s no tax on the family home. And there’s other concessions around wealth in Australia, things like trusts and so forth. So there’s certainly money that can be found there. I think for the sort of scheme that David Ingles and Miranda Stewart were proposing, that was probably quite a sensible place to go. They’re also trying to minimise the effective marginal tax rates. So if you fund it through personal income tax increases, you go straight to increasing what are called effective marginal tax rates. And that’s sort of lowering your incentive to work, whereas wealth tax, you tend to get at those people who perhaps are not actually even working, and it returns a little bit of money to the state through that avenue.
Gene Tunny 16:35
Right. Could you tell me a bit about that proposal that you modelled for Miranda and David? So what did the wealth tax look like? Can you recall the threshold and what the impacts were, Ben?
Ben Phillips 16:49
So from memory, Gene, the amount of money that was being given out through this scheme wasn’t actually particularly large. I think it was roughly in line with the sort of amount of money that we give out to family payments, which is around sort of five or $6,000 per year. So in that sense, it wasn’t there to replace the current welfare system. It was really just as a very low base addition to what we currently have. So it wasn’t a large amount of money. We didn’t need to find nearly as much money say as a full-blown universal basic income scheme. And I think in terms of wealth, we just made a very simple assumption around I think it was non-housing-related wealth, and taxing that. So you’ve still got a fair amount of money. You’ve got about $4 trillion in Super. That compares to say that $10 trillion in housing, which much of which we weren’t touching, because it’s in the family home. I think it was just a flat rate of tax per year. I can’t remember the exact rate. It was at probably a small amount per year, which is enough to sort of fill out probably the several trillion, the several billion dollars worth of money you need to fund these sorts of schemes.
Gene Tunny 17:54
Right, okay. Yeah. Okay, so I guess it’s probably the politics of it that’s going to defeat it, from just based on this conversation. It sounds like, I mean, sure, if you’re going to implement it, and if you’re going to implement what people would generally perceive as a universal basic income when they think of a universal basic income. So I think Andrew Yang was talking about in the States, was it 1,000 US advance then? And that’s why I was thinking, well, if we had it in Australia, it’d probably be around maybe 15 to 20,000 a year. And if we’re going to have that, then that does imply a large increase in taxation. And there will be a lot of pushback, but in some segments of the community, particularly where they’re going to be paying more. And we saw what happened in the last election, the last federal election when there was a proposed change. I mean, you mentioned the carbon tax and then look at what happened when the opposition proposed doing something about the franking credits issue with the with the shareholders. So yeah, it seems like people, if you look at what it actually implies, it’s probably politically infeasible to bring it in. Do you have any thoughts on that, just how the likelihood or feasibility of bringing something like this in?
Ben Phillips 19:30
Look, to be honest, Gene, and I don’t really think it’s something that’s on the radar of say the major political parties at this point, not to say it won’t be at some point in the future if the world changes, but at the moment, I think as you pointed out, the potential of the requirement for such substantial tax increases would virtually rule that out. Ignoring whether or not it’s sensible or that it’s economically sensible, I think it’s the tax increases will just be too substantial. I think there are some problems with our current welfare system at the moment. But they really are only, they’re relatively small changes that are required to fix that. So for example, the JobSeeker Payment many would argue is a little bit too light, needs to be increased by probably a modest amount per year. So at the moment it’s about 630 per fortnight. It probably needs to be at least another couple of $100 a fortnight higher than that. The cost of that is only a few billion dollars per year. There’s a few other issues with the welfare system, particularly around say some of the conditionality, that’s probably a little bit too punitive on those on the payment. You could loosen some of those up, I think you can potentially improve the current system that we’ve got. That is very well targeted, I think. And you can improve it with only relatively modest amounts of money. So maybe, you know, as little as say $10 billion per year could really make a very large difference to that system. So $10 billion for what I think could give you a reasonable system compared to say having to spend potentially at least $100 billion on one of these more grandiose schemes of universal basic income. I think that shows the relative costs and minimal additional benefit, I think, where you end up a very big sort of a churn, additional churn in the system, for no particular great benefit. So I think there’s some relatively easy fixes that are relatively cheap. More people might disagree with to say $10 billion is relatively cheap or not. But compared to these other big schemes, I think it’s relatively cheap. So get a relatively simple fix for not a lot compared to these very expensive schemes. That’s probably where I would see it potentially going, if we are going to go down that path.
Gene Tunny 21:33
Yep. So it’s probably not. I mean, the big issue at the moment is that, well, arguably, some of the welfare payments are too low, and that therefore if you’re going to do anything with the welfare system in Australia, then you should look at increasing some of those payments. I was just thinking, I mean, in other countries, maybe that there are different issues. I mean, with the US, for example, I guess what’s attractive about the UBI in the US is that their welfare system is not as generous as ours, or it’s not as much of a safety net. So perhaps that’s why it’s more attractive in the States. Although I guess it does have a lot of support here in Australia. There was something reported on ABC, a majority of Australians would welcome a universal basic income, a survey found. But then I think that’s because people aren’t aware of just what it means for tax rates. And if anyone actually proposed that as a real thing, and they had to talk about how they funded it, how they would fund it, it will quickly become apparent it was … It’s not something necessarily I’d support, but it would involve some redistribution. I guess where some people, why they support it is that they, you know, there are a lot of people who think housing’s becoming increasingly unaffordable. And this could be seen as a way of supplementing their income. So could it be seen as a way of … Is it basically about more redistribution? So redistributing more from the top end to the lower deciles? How have you done analysis of what it means in a distributional sense, this universal basic income? I suppose it depends on the model that you apply. But what could it look like? I mean, could it actually improve the wellbeing of households in the sort of lower deciles? Not just the most disadvantaged, where we’re assisting them currently with welfare benefits, but households where they’ve got people in the house are working? Is it going to be a way of supplementing their incomes and, you know, making it easier for them to say buy a house? Could that be a benefit of it?
Ben Phillips 24:00
It’s certainly one benefit of it, Gene. Again, as you say, it depends exactly what sort of model you’re using here. It could vary wildly. But the models that I’ve looked at in the more sensible versions, they are funded usually through an increase in a wealth tax or increase in say, an income tax. And they usually tend to be quite progressive taxes. So as a result, you do tend to find that with most of the basic income schemes, at least I’ve seen, you do get a redistribution from the rich to the poor, effectively, and we end up having income inequality that looks a little bit more like Nordic countries, rather than our current system, which is fairly sort of middle of the road, I suppose, similar to the UK and a little bit better than the US, but more closer to the Nordic countries. So you do get that impact. A lot of people are concerned about why would you give say $10,000 to someone on $150,000 a year. Well, that’s understandable, but they’re probably paying even more than $10,000 in tax to fund it because we’ve got such a progressive system. So that’s true, it does redistribute the income from the rich to the poor. That’s probably one of the positives of it.
Gene Tunny 25:02
Right. Okay. Now, what does it mean for those effective marginal tax rates? Does it actually reduce them? Is this a way of reducing the impact or am I on the wrong track here, Ben? Sorry, I think I’m off.
Ben Phillips 25:21
Again, Gene, I think it really depends on the model. You could have one model where it would reduce them, one where it would increase them. I think, as a general rule, the more money that the higher the programme costs, the higher the overall EMTRs are for the country. The more churn you have, the more you more you give, the more you’re going to take as well. There having said that, I think what it can do is it probably does lower the effective marginal tax rates for certain groups, particularly low-income groups and say, single parents, where they do typically have quite high EMTRs, but it would increase the EMTRs from say the middle of the income distribution to the higher end of the income distribution, because they’re the people who are funding it. So for example, I did some modelling with some guys from Macquarie Uni in Sydney. And we had a relatively cheap form of basic income, which is costing about 100 to 120 billion a year. And I think what we found there is you have to increase the marginal tax rates across the board by about 15 cents on the dollar. So that means that say that the 19 cents becomes 34 cents in the dollar. And so the 45 cents becomes sort of, you know, around 60 cents on the dollar. So obviously, for those who are not in the welfare system, at the moment, they would have a much higher marginal tax rate. Those who are in the welfare system, probably what we call the withdrawal rates of that basic income are quite small. So you probably have a lower effective marginal tax rate down the bottom end of the income distribution. So it really varies where you are in the income distribution. But I think as a general statement, overall, if you’re giving more money out, you’re probably going to have a higher EMTR across the board. But for certain groups that do face very high EMTRs at say, 70, 80, 90 cents on the dollar, they probably would come down.
Gene Tunny 27:04
Right, okay.
Ben Phillips 27:05
When you’ve slanted out across the income distribution is one way of thinking better, but a little bit higher overall.
Gene Tunny 27:10
Okay, I’m just trying to understand how this would work. So it sounds like with some of these, that well, the age pension, it sounds like that’s probably at the moment higher than any, or what I was thinking would be a universal basic income, which is sort of in the 15 to 20k range. So does that mean, could there actually be some welfare recipients who would be worse off under some models of UBI?
Ben Phillips 27:42
Yeah. Look, I think mostly what they do, Gene, is they, they only apply it to the working age population. So they say, look, if you’re an aged pensioner, we’re not so concerned about you. Many of the issues that relate to universal basic income, as to why you might introduce the UBI, don’t apply to the age pensioners, so we leave them as they are on the age pension. It’s more about the working age first. So if you’re on JobSeeker or say you’re missing out on JobSeeker at the moment because of you know, the wealth, the liquid assets test or some other income test you’ve got, you would be better off under the UBI scheme. And also, you would be losing that money more gradually as your income increases, whereas at the moment, you might be losing say 50 cents, or 60 cents on the dollar, for every dollar that you earn. It’s people who are on the JobSeeker payment, who are working part time, they might be better off and face lower effective marginal tax rates as they increase their income. Where it would impact people is say those around say 80 or 90,000 a year, you might go from say being on 30 cents on the dollar to say 45 cents on the dollar. That’s a big problem, I think, as I see it, for these more expensive versions of the universal basic income,
Gene Tunny 28:50
Right, okay, what about single parents? Do you know how they would be affected by a UBI if it was brought in and it replaced the current suite of benefits?
Ben Phillips 29:03
Yeah, so some of the models that I’ve looked at, what we’ve tended to do on this, really, it’s where you start to make … One of the main reasons you have a UBI is to have it as it’s sort of simple. One of the big arguments is that the current system is too complicated. And it is complicated, no doubt at all. I would argue it’s complicated because it is complicated. The world’s complicated. You’ve got single parents, you’ve got disability, pension recipients, you’ve got all sorts of different people in different situations. This is one of the things I like about the current system, where it targets to those sorts of issues. But in terms of single parents, yeah, if they are on 15,000 a year, they will be worse off. And that’s where you might have some special clause where if you’re a single parent, you remain on the current payment, but then you’re going back to another complicated system. This is why I sometimes wonder about what the point of a UBI is, unless it’s I’d say at the age pension level.
Gene Tunny 29:58
Right, which is …
Ben Phillips 30:00
Which is about say about $25,000 a year.
Gene Tunny 30:05
Okay. And is that similar to what the Greens is proposing that’d be …
Ben Phillips 30:10
Thereabout 30,000 a year.
Gene Tunny 30:11
30,000 a year, right, okay.
Ben Phillips 30:13
So where that comes from, Gene, is when the JobSeeker was increased when we had COVID, it was increased to about 1,115 per fortnight. And I think the Greens have gone along with that number, which is closer to about sort of 28, 29,000 a year or 30,000 a year. I forget the exact figure. Which relates to the Henderson Poverty Line, which is, in my view, a fairly outdated version of … As you probably recall, Gene, it was constructed by the Henderson review into I think, probably in Australia back in the 60s and 70s. Yeah, so it’s very outdated.
Gene Tunny 30:50
Yeah. So UBI, I mean, it certainly would be a nice thing to have, just thinking about it. I mean, and one of the advantages that’s put all the pros or the arguments in favour of it is it would allow us to be able to choose our lifestyle. And I mean, we could take a few months off and devote it to yoga or to improving our wellness, that sort of thing or writing a book. So look, I can see the attraction of it. It’s just the fiscal cost of it and implementation. We’ve already got this welfare system in Australia, at least that seems to do a reasonable job at not too high a cost. But I can see the attraction. What about this, there’s this vision of the future where with AI on automation, we have massive job losses, even among white collar professionals? Now, I mean, you know, we’re economists, so we’re probably great believers in the market adjusting, and eventually people finding new jobs in this in the services sector. But do you have any thoughts on that, Ben? I mean, how big a risk is AI and automation? And to what extent does that improve the argument for a UBI, if that’s the case that we could see these massive job losses in the future?
Ben Phillips 32:26
Yeah, look, I would, probably a bit like yourself, Gene, be clouded by my economics background. I guess looking at history over the past 50 or 60 years, we’ve had some pretty incredible technological changes that arguably are larger than what we’re currently seeing. And you know, you have periods of course, where you have some higher unemployment. But generally speaking, the economies have transitioned and people have transitioned. Perhaps there are strong arguments for, I guess, helping people restructure their lives, structural assistance packages for those in industries that disappear, and that there is the argument of, as you said, of basic income advocates that you have a UBI for that potential outcome in the future. But I’m sceptical of it, Gene. That said, I’m not a futurist, so I don’t really know what the future holds in that area. I could be wrong, but I’m a little sceptical, just given that we’ve had very large technological change in over the last century and people still remain in jobs. Yes, there are issues, you know, for certain people in certain industries. But that’s sort of part of the ebb and flow of the economy.
Gene Tunny 33:34
Absolutely. Okay. Well, just finally, this affluence-tested model, is that the one you recommend? Would you be able to go over that again, please, Ben? I’m just interested in what exactly that is.
Ben Phillips 33:50
The affluence-tested model, Gene, this is the model that some co-authors of mine, Ben Spies-Butcher from Macquarie University and Troy Henderson from University of Sydney, I guess it’s their model, their version of universal basic income. Obviously they’re well aware that a full-blown UBI is very expensive and politically difficult to implement. So it was an attempt to come up with a model that might be a little bit more politically possible within Australia. And that model really was, let’s look at the current JobSeeker amount. We’re a little bit higher than the JobSeeker amount, so that 15,000 or 18,000, two different models, 15,000 year and a more generous 18,000 a year and apply that to all adults. But it was in effect means-tested or affluence-tested, as they called it. So that was as your income increased, you’d lost some of that payment. So basically, up to about 10. You can earn up to 10,000 a year in income, and you’d receive the full 15 or 18,000 for the year, by that median income that have gone to about half and by about 180,000 you have none at all. So it still costs about 100 or $120 billion per year. So that’s still roughly a doubling of the current sort of welfare system. So it’s very, very substantial. But obviously, it’s a lot cheaper than a full-blown system. And it does have the benefits of, some of the benefits of the basic income. It sort of becomes a bit more like a guaranteed minimum income, I guess, rather than a universal basic income. So that was their model. I think it’s quite interesting. But again, it’s got that concern of being wildly expensive, and we didn’t need to increase personal income tax rates, I think it was by 15 percentage points to the more expensive version. And I think adding that on to the current personal income tax rate regime would scare a lot of people off and would be politically extremely challenging.
Gene Tunny 35:43
Yeah, yeah. Okay. So just for clarity, this was a proposal that the other authors, it was their proposal, and you were doing the modelling for that.
Ben Phillips 35:53
That’s correct. Yep.
Gene Tunny 35:54
Gotcha. Okay. Ben Phillips, any final thoughts on UBI before we wrap up?
Ben Phillips 35:59
Oh, look, I think we’ve covered pretty well, Gene. I think it’s a really, in one sense, it’s interesting. I think that people are talking more and more about these sorts of schemes. I do feel that there are some problems with the current welfare system and I think there’s some ideas of UBI that we can borrow. I think the a lot of the issues we’ve identified could be used to improve what we’ve currently got. I think a more realistic and practical approach is probably just to fix up some of the issues in the current system at a fairly minimal cost, as opposed to the full-blown versions of UBI that I think are interesting, but perhaps not really realistic in the current environment. Too much of a change for Australia, whether we like it or not.
Gene Tunny 36:41
Yep, yep. Absolutely. I agree with you. So yeah. Thanks, Ben. That was great, a really good overview of the issues in Australia. I’ll have to have a look at what it might mean in other countries, but I’m guessing that it would involve a similar high level of expenditure, additional expenditure, and therefore a higher tax burden. I will have to look into that. And, yeah, I thought that that point you made about how well it could be seen as a way of addressing some of these inequality issues. And then we’d look more like the Scandinavian countries. And perhaps we do. I mean, our inequality isn’t as high as in the US, but you’re saying it’s similar to UK. It’s lower in some of those Scandinavian countries. So that’s something I’ll cover in a future episode. Just, you know, what’s going on in those countries. Always fascinated with that sort of Nordic model they talk about. So I thought that was a really good point. So Ben, but just want to thank you so much. I think what’s great about your work is that you’ve really modelled all this out, you’ve thought about what this looks like, in a practical sense, how it could be implemented, what that means for all the different groups in the community. And so yeah, I can highly recommend your work. So there’s Basic Income for Australia: Exploring Rationale, Design, Distribution and Cost, that you co-authored with David and Miranda. I’ll link to that in the show notes. So Ben Phillips, really enjoyed that. Thanks so much.
Ben Phillips 38:26
Thank you, Gene. My pleasure talking to you.
Gene Tunny 38:29
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Gene Tunny 39:04
Now back to the show. Okay, I hope you enjoyed my conversation with Ben on UBI and got a lot out of it. I certainly did. In this segment of the episode, I want to cover some issues that I didn’t get to chat about with Ben, particularly whether UBI will have a big negative impact on people’s labour supply. So their willingness to work. Will we see people dropping out of the workforce, drastically reducing their hours of work, and therefore reducing the capacity of our economy and the government’s capacity to raise money to pay for a UBI?
Now around the world, we’ve had several experiments of different types of UBI over the years. I intend to devote a future episode delving into the details of these experiments, and even into the negative income tax experiments in the 70s. I probably don’t have enough time at the moment to do full justice to those experiments, but I will try to summarise what I’ve found so far. One UBI experiment which received a lot of media attention happened in Finland, in 2017 and 2018. 2,000 randomly selected unemployed people received a 560 euro a month payment, which was similar to the unemployment benefit payment. But they received it for the trial period, and they didn’t lose it, they didn’t lose the UBI if they started working.
Now, I’m going to rely on a great article from The Economist. So one of my favourite magazines. This article was in March 2021, Might the Pandemic Pave the Way for a Universal Basic Income. I’ll put a link to that Economist article in the show notes, but it may be paywalled, and you may need an Economist subscription to access it. In the article The Economist reported evidence from the experiment was muddied by a change to a law in 2018, which tightened conditionality for receiving unemployment benefits. Even so, the results are intriguing. Among the biggest worries relating to UBI is the possibility that it might discourage recipients from seeking paid work. Yet, participants who received unconditional payments actually work more than those on the dole. Reported wellbeing was substantially higher. Recipients also registered less depression and stress, a higher degree of confidence in their abilities, and more social trust than did those in the control group.
The Finnish results are broadly consistent with findings from other experiments. Rebecca Hasdell of the Basic Income Lab at Stanford University conducted a review of 16 basic income studies published between 2009 and 2019, that covered rich and poor countries. The research provides consistent evidence of a positive effect on educational attainment and on measures of physical and mental health and reduce poverty. Effects on labour market participation are generally small. Half of the studies that assess its impact do not find a statistically significant effect. Most of the rest find a positive effect, she writes. Okay, so that’s really interesting.
Based on the experimental evidence that we have, and assuming the Economist is reporting it correctly, we may not have to worry about lots of people dropping out of the workforce if a UBI is implemented. However, as the Economist notes later in that article, these experiments don’t necessarily tell us what would happen if a UBI were available on a wide scale. They talk about the possibility of a social multiplier effect. Okay, so the Economist notes, some activities become more enjoyable as more people engage in them. So what they’re getting at there is that being out of the workforce is going to be much more enjoyable when more of your friends or family are also out of the workforce, they’re not working, so you can more easily spend time with them.
Possibly, you could even foresee a risk that you have sizable groups of people that maybe they can drop, they might drop out of the workforce at the same time and set themselves up in, well, for lack of a better word, communes. Perhaps that’s something that could happen. Are these legitimate concerns? I really don’t know.
But I do know a UBI would cost a lot of money. As Ben and I chatted about in our conversation. So the major criticism of UBI that it’s incredibly costly, and it would require much higher taxes, I think that is an important criticism and it still holds. On the work incentives issue, Ben Phillips’s view is that the net impact of a UBI is unclear. This is because of what Ben and some of his co-authors describe as a complex interaction of income and substitution effects. Okay, what do they mean by this? Here’s how I understand it.
The income effect that they’re talking about is the change in labour supply expected to be negative due to the change in income brought about by a UBI. So, a UBI, all other things equal, will boost income. And people might choose to spend that income on more leisure by working less in paid employment, okay. The substitution effect that they’re talking about relates to the substitution between work and leisure, as the relative price of leisure changes as the opportunity cost of leisure. So the loss of income, the money that you get in the bank, if you take an hour off work, or you, you take an hour in leisure, there’s a substitution effect. Because a UBI affects what is called the effective marginal tax rate, the EMTR. So Ben and I were chatting a bit about that, in our conversation.
Let’s remind ourselves that the effective marginal tax rate is the percentage of additional income that we earn, that we don’t get to keep. So it’s the percentage we don’t get to keep. And we don’t get to keep it because either A, the government takes it off us in tax, or B, the government reduces a welfare benefit that we’re currently receiving. And it does that because we’re earning money from working. If there’s a change in the EMTR, then the relative price of leisure changes, okay, so if the EMTR increases, so the government’s taking more off you in tax for an additional hour that you work, then that makes work less attractive to leisure, it means that the relative price of leisure has fallen, so the opportunity cost of leisure has fallen, because you’re getting less money for that additional hour of work. That makes leisure more attractive. And so you might work less, you’ll take more leisure.
Okay, I hope that makes sense and I explained that properly and I didn’t get lost midway. As you can appreciate, this is extremely complex. There’s quite a lot going on. As Ben and I discussed in our conversation, a UBI is expected to reduce the EMTR for current welfare recipients. So if you’re currently receiving a payment from the government, then your effective marginal tax rate is expected to fall, because the UBI wouldn’t be as aggressively taken away or clawed back as current welfare benefits are when people start earning money. Okay. So for welfare recipients, a UBI could actually result in additional hours worked, depending on their circumstances.
This gets really complicated, as Ben tried to explain in the in our conversation and as they go into in their papers. Okay, so Ben and his colleagues, David Ingles, and another colleague of his, previous show guest Professor Miranda Stewart, they wrote in a 2019 paper, which I’ll link to in the show notes, that the aggregate impact on work incentives is unclear. This is because the high linear tax rate required to finance the BI, so BI is what the authors are calling UBI in whatever model that … They go through a few models in their paper, but when they say BI they basically mean UBI. That high linear tax rate may increase work disincentives across the population.
Okay. So to finance the UBI, we’ve had to put up tax rates. And that’s going to increase the effective marginal tax rate for many people who are working and aren’t receiving welfare benefits. And so therefore, if they work an additional hour, they don’t get to keep as much. And so what does that mean? Well, that means that the relative price of leisure or the opportunity cost of leisure, if I take an hour off, then I don’t lose as much because the government, it wants to take more of that money I make, an additional hour. So it affects the work incentives for that group of people.
Now look, there’s a big literature on labour supply and how it’s affected by after tax earnings that we don’t really have time to go into today. I should cover it in a future podcast. I think it’s enough for now to say that look, this is very complex. This is the point Ben’s trying to make. The key takeaway is that the UBI will mean different people will respond to it in different ways. And it’s hard to know what will happen to overall labour supply unless, well, unless we actually introduce a UBI and find out.
Okay, I should note that Ben has used a static micro simulation model. So his modelling has been conducted using ANU PolicyMod. So he hasn’t explicitly modelled those work incentive effects or the impacts on labour supply. Now, my feeling is this, this is something that would be extremely difficult to model. Policy experiments are possibly our best hope of figuring out whether a UBI is simply a utopian fantasy that is unaffordable, or whether it is something that really is feasible, and that could improve our lives immensely.
As always, I’m trying to keep an open mind on these important policy issues. So that’s all I have to say on UBI for now, but I’m sure I’ll come back to it in future episodes. I know a lot of people are interested in it. So please consider this as a first instalment. I hope you enjoyed it and found it informative. Please get in touch with any comments or suggestions. I would love to hear from you. You can email me, contact@economicsexplored.com. And again, there’s a SpeakPipe service that can let you record a voice message if you’d like to do that. Okay. Thanks for listening.
Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.
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